Bookrunner Merrill Lynch took an unusual but effective approach to syndicating a convertible for IBT on Wednesday (December 15). Faced with the common problem of having to bring a deal to market with aggressive terms, it decided to bookbuild the transaction on a range that spanned no fees to full fees.
Historically banks have got caught out trying to sell deals at par to a reluctant investor base and then having failed to build any momentum, have had to drop pricing down or through their fees. In this instance, Merrill's took the opposite approach and went out with a range that would have given it no fees had it priced at the bottom.
However, far from having to price at 99.35%, it was able to generate momentum and leverage investors up to par where it finally priced five times covered. At the end of yesterday's trading, it had also traded up to 100.5% to 101%.
Terms comprised a five-year maturity and an issue price of par, with a two-year put price of 99.98% and redemption price of 99.95% to yield minus 0.1%. The conversion premium was fixed at 15% to the stock's VWAP of NT$22.8 or 16.3% to its close of NT$22.5.
Specialists say the stock had been fairly stable in the trading day ahead of pricing before suddenly dropping from NT$23.1 to NT$22.5 about five minutes from the close. Overall on the day it closed down 0.9% and bounced back yesterday to NT$23.
Underlying assumptions comprise a bond floor of 92%, implied volatility of 28% and theoretical value of 99.8%. This is based on a credit spread of 90bp over Libor (A+ local rating), 5% borrow cost, full dividend protection and historical volatility of 27.5%.
Specialists say one of the main challenges the deal faced was pricing through historic volatility at a time when investors are very sensitive to it. "When terms for this deal were first filed, investors were looking at volatility levels up in the 40's," comments one observer. "Since then the market has weakened and they are looking at levels in the high 20's."
He went on to add that the deal was well received for two reasons. Firstly half a dozen long-only accounts put in fairly large price insensitive orders that formed the core of the book and gave other investors confidence. Secondly up to 35% of the deal was immediately asset-swapped and removed paper from the market.
Year-to-date IBT has risen 41.23% and has been the subject of M&A rumours going into a new year, in which analysts believe there will a resumption of active consolidation in Taiwan's overbanked financial sector.
